Cash flow statement is a statement which shows how the operations of the company affects the cash position of the company during a financial year and therefore companies usually make both cash and funds flow statement. Given below are some of the advantages and disadvantages of cash flow statement –
Advantages of Cash Flow Statement
- It shows the actual cash position available with the company between the two balance sheet dates which funds flow and profit and loss account are unable to show and therefore it is important to make a cash flow report if you want to know about the liquidity position of the company.
- It helps the company in making accurate projections regarding the future liquidity position of the company and hence arrange for any shortfall in money by making arrangements in advance and if there is excess than it can help the company in earning extra return out if idle funds.
- It acts like a filter and is used by many analyst and investors to judge whether company has prepared the financial statements properly or not because if there is any discrepancy in the cash position as shown by balance sheet with cash flow statement than it means that statements are incorrect.
Disadvantages of Cash Flow Statement
- Since it shows only cash position, it is not possible to arrive at actual profit and loss of the company by just looking at this statement alone.
- In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc…, and therefore limiting its use.
As one can see from the above that cash flow has benefits as well as limitations but the fact is that this statement is prepared by majority of companies in order to ascertain the cash position of the business as cash has the maximum weightage when it comes to liquidity available with the company at any point of time.